5 May 2015
The Reserve Bank of Australia (RBA) decided to cut the cash rate a further 0.25% to 2.00% at today’s meeting after leaving rates unchanged at the last two meetings.
Leading into today’s meeting, economists and markets had been expecting a 0.25% cut to rates. Following the announcement, the Australian share market spiked before quickly falling back away. Surprisingly, the Australian dollar rose against the US dollar as bond yields pushed higher on the possibility that this may be the end of the RBA’s rate cutting cycle.
The main reason for cutting rates was threefold:
1. To put further downward pressure on the Australian dollar against the US dollar, but more importantly, against all other currencies;
2. To put a floor under falling inflation which now sits at the bottom end of the RBA’s 2-3% inflation band; and
3. To counter the possibility of a harsher than expected budget in the coming week given the sharp drop in the terms of trade.
Most of the RBA’s statement resembled the statements from the last two meetings. Key differences related to the increase in accommodative policy measures globally (i.e. the need to keep up with the Joneses to ensure our policy stance doesn’t deviate too far from the rest of the developed world), stronger growth in Australian employment numbers, prices for equities and commercial property continuing to be propped up by lower long-term interest rates, and the need for the Australian dollar to fall further against a basket of currencies given the significant declines in key commodity prices.
The RBA was encouraged by the recent increases in household demand and better than expected employment data. The low inflation readings of late afforded them sufficient room to cut rates further, whilst impressing upon all that they will be stepping up their work with other regulators to assess and contain risks that have arisen in the housing market (specifically, Sydney).
Barring any major changes to data over the coming months, we expect the RBA to follow a similar pattern to earlier in the year (hold rates steady for the next one to two months) and allow the current rate cut filter its way through the economy.
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